The Unassuming Economist

Through cross-country evidence, the Organisation for Economic Co-operation and Development (OECD) has shown that economic inequality has risen in most OECD countries in the last thirty years or so while social mobility has stagnated or worsened. In its most recent report, the OECD turns its gaze to the question of how people perceive inequality and social mobility.

When it comes to questions on the perception of inequality, it has been shown in the report that there is overwhelming concern regarding income distribution and the lack of equal opportunities in the average world citizen. However, far from being an umbrella statement, there are instead a multitude of layers shaping people’s understanding of the phenomenon and factors affecting it.

In this report, emphasis is laid on providing an explanation to several such factors such as whether people care about inequality, how connected is their perception of inequality to the actually prevailing reality, how supportive is the general public for increased governmental action to bridge income gaps and how far are the people ready to go to hold governments accountable for failing to do so. It then moves on to providing interesting policy insights about the reform process and some hitherto ignored policies that have worked well.

Click here to read the full report.

In a recent working paper of the Bank of England (2021), authors Jonathan Bridges, Georgina Green, and Mark Joy evaluate a panel dataset of 26 developed nations over 5 decades preceding the Covid-19 pandemic to show that inequality rises following recessions, and rapid credit growth in the time until downturn exacerbates that effect. This growth, whether financial or normal in nature, increases unemployment and inequality effects. They observe that “one standard deviation credit boom leads to a 40% amplification of the distributional fallout in the bust that follows”.

Moreover, “low bank capital ahead of a downturn amplifies the inequality increase that follows. These insights add a new dimension to policy cost-benefit analysis, at the distributional level.” The paper’s results indicate that a 55% amplification in the cyclical response of income inequality to a recession if a country enters the recession with bank capital ratios one standard deviation lower than average. The authors note that using the tools established in new macroprudential norms empower economies to safeguard their financial stability using both borrower and lender resilience, but can also lead to distributional costs in the event of an untamed crisis.

“Taken together, these results suggest an important link between credit, crises, and inequality. They demonstrate that tail events for the macroeconomy also represent distributional shocks.” Vulnerabilities like the rapid accumulation of debt, weakening of bank capital, and an increased risk of recession transforming into a full-fledged financial crisis can all contribute to distributional effects and rising inequalities when a crisis actually strikes. While the use of macroprudential policies to address these vulnerabilities has both, associated costs and benefits, entirely avoiding the usage of these policies entirely can lead to severe macroeconomic and distributional ill effects.

Click here to read the full paper.

“Today, wherever people live, they don’t have to look far to confront inequalities. Inequality in its various forms is an issue that will define our time.“

As the United Nations puts it, inequality of income, opportunity, and a variety of other factors is among matters of utmost importance to governments, multilateral institutions, and people at large today. Modern-day discussions on the theme seek to understand inequality by analyzing it through multiple lenses, discussing conflicting opinions, and contrasting approaches to tackle it.

In one such discussion presented underneath, economists David Green of the University of British Columbia and Parikshit Ghosh of Delhi School of Economics deliberate on factors influencing the state of inequality today such as trade and globalization, the gradual ideological shift to the ‘right’, changing nature of work – the role of technological advancements, hierarchies created by higher education, and ‘rents’ rather than returns to skill, and the new role of social protection that goes beyond income support.

The entire video can be accessed here.

On the other hand in their latest blog economists, Rohini Pande and Nils Enevoldsen discuss the salience of redistribution policies in poverty and inequality eradication. They contend that country-level catch-up in incomes will not be sufficient to eradicate extreme poverty, as the blessings of this ‘growth’ are not reaching the poor. Inclusive prosperity requires a political solution – redistribution.

Click here to read the full blog.

“The (International Monetary) Fund’s stance on equity has changed in parallel with external circumstances and the demands of its members, driven, sometimes forcefully, by its MDs. Poverty featured prominently in the Fund’s discourse in its early years when the institution began to take into account the voice and needs of its most vulnerable members. The 1980s and 1990s saw the consolidation of concessional financing, which broadened its focus towards equity between individuals and the “high-quality growth” championed by management and, at first, also by member countries. In the research conducted by the institution’s staff, inequality, social factors, and gender issues gradually gained prominence. These factors were included only to a limited extent and temporarily in the Fund’s activity, given the absence of strong support from the Board.

At the beginning of this century, there was growing disaffection with the Fund among developing countries, which demanded to be treated on a more equal footing. The far-reaching institutional and cultural reform of the IMF in the first decade of this millennium helped to put inequality and other macro-critical issues firmly on the Fund’s agenda. It is possible that the fallout from this century’s two major crises is contributing to consolidate inequality, gender, and the environment in the Fund’s activity and discourse. This may also have been assisted by the fact that the IMF has been led by two women in the recent past.

This paper has analysed how equity issues have been incorporated into the debate and design of the Fund’s policies and, through its texts, what stance each agent (management, member countries and staff) has adopted at each point in time. As a possible follow-up to this analysis, it is worth exploring the extent to which the Fund has put this “declaration of intent” into effect in its surveillance and lending activity and whether its implementation has been consistent with the general guidelines on equity. A text-mining analysis of the content of Article IV reports and IMF programmes could help assess the effective implementation of these issues, for which the annual reports provide only an approximation, and to verify the consistency between discourse, policy design and implementation.”

Source: Banco de España. 2021. The International Monetary Fund’s View of Social Equity Throughout Its 75 Years of Existence (p. 18)

Click here to read the full report.